Economist Ed Sullivan addresses U.S. recovery

Public Works' Editorial Director, Bill Palmer, interviewed Portland Cement Association's (PCA) Chief Economist, Ed Sullivan, on the state of our economy in terms of construction and state deficits.

Bill Palmer: Why is the west so much worse?

Ed Sullivan: One of the big things is - those that participated in the housing boom. In terms of demographics it's a great place to live, but [homebuyers] were seduced by exotic mortgages, so there's a huge foreclosure issue. In many of these states, construction is a huge component of the economy, and residential is a huge component of that. That helped to undercut some of the economic footing, which cascades into a drop in job growth, higher vacancy rates on nonresidential buildings, and the emergence of huge budget deficits for state and local governments.

If you look at the middle part of the U.S., they still suffered, but not nearly as much because they weren't seduced by the exotic mortgages and home prices weren't as exaggerated.

BP: Does residential construction have to come back before the commercial and public markets can gain strength?

ES: No. They are totally independent, although there are some of the same forces. In residential [and commercial], a builder isn't going to build unless he can get a return on his money. Home prices are still falling because of foreclosures, so a builder is only going to make money when there are stable prices and there's not a long carrying period for inventory. Neither one of these is going away until the foreclosure issue goes away - and that's at least early 2012. Nationally, you are looking at late 2012 or early 2013 before we see a substantial recovery in housing.

We think public construction has bottomed out and that's tied to employment. You lay off a worker, you lay off a taxpayer. So the issue now is state deficits. The private economy is doing OK, but what's happening with federal and state governments brought the GDP down.

Public construction has been cut so severely that we think it's at the low threshold. As you get job growth, budgets start to look better and we expect surpluses in 2013. But because, for example, I don't have the money and don't repave the road, once the employment picture comes back the road still isn't fixed. There will be pent-up demand and that's going to be released when employment comes back. So the issue becomes the highway bill and we don't think that will be addressed by Congress until 2013.

So, bottom line, we're going to run along the bottom for the rest of this and next year - it won't be until 2013 until things start really coming back. The western part of the country will be among the laggards, although Florida and Georgia are pretty bad too. The budget deficit in California has a big impact on all of this and that can change the long-term outlook.